<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
-
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from xxx to xxx
Commission File Number 333-76763
New World Pasta Company
(Exact name of registrant as specified in its charter)
Delaware 52-2006441
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
85 Shannon Road, Harrisburg, PA 17112
(Address of principal executive office) (zip code)
(717) 526-2200
(Registrant's telephone number, including area code)
100 Crystal A Drive, Hershey PA 17033
(Former Address of principal executive office) (zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
_____ -----
As of August 15, 1999, the registrant had 5,000,000 shares of common stock
outstanding and 113,485 shares of preferred stock outstanding.
<PAGE>
NEW WORLD PASTA COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at July 4, 1999 (unaudited),
And December 31, 1998 1
Consolidated Statements of Income (unaudited) for the Three
Months ended July 4, 1999, and six months ended July 4, 1999 2
Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended July 4, 1999 and July 5, 1998 3
Consolidated Statement of Stockholders' Equity (Deficit)
(unaudited) for the six months ended July 4, 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risks 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to Vote of Security 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
NEW WORLD PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
As of July 4, 1999 and December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
(unaudited)
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,198 $ -
Trade and other receivables, net 18,150 18,447
Inventories, net 22,513 22,547
Prepaid expenses and other current assets 2,149 4,793
Deferred income taxes 1,642 3,275
--------------- ---------------
Total current assets 55,652 49,062
Property, plant and equipment, net 105,483 108,928
Deferred income taxes 111,899 -
Intangible assets, net 65,798 67,027
Deferred debt costs, net 9,131 -
--------------- ---------------
Total assets $ 347,963 $ 225,017
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1,400 $ -
Loans payable 294 -
Accounts payable 7,771 9,657
Accrued marketing costs 12,255 10,932
Accrued interest 6,582 -
Accrued cost of restructuring 2,700 -
Other accrued liabilities 11,824 7,675
--------------- ---------------
Total current liabilities 42,826 28,264
Long term-debt, less current maturities 298,250 -
Deferred income taxes - 21,937
Employee benefit liabilities 7,872 7,872
--------------- ---------------
Total liabilities $ 348,948 $ 58,073
--------------- ---------------
Mandatorily redeemable cumulative preferred stock, $1,000 par
value; 115,000 shares authorized; 113,485 shares issued and
outstanding as of July 4, 1999 119,317 -
--------------- ---------------
Stockholders' equity (deficit):
Common Stock, $10 par value; 5,000,000 shares authorized;
5,000,000 shares issued and outstanding as of July 4, 1999 50,000 -
Additional paid-in capital 112,906 -
Retained earnings (deficit) (283,208) 166,944
--------------- ---------------
Total stockholders' equity (deficit) (120,302) 166,944
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 347,963 $ 225,017
=============== ===============
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated statements.
(1)
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
for the periods ended July 4, 1999 and July 5, 1998
(in thousands)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Three Months Ended Six Months Ended
July 4, 1999 July 5, 1998 July 4, 1999 July 5, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 84,531 $ 84,263 $ 180,802 $ 192,910
Cost of sales 46,231 45,618 97,844 105,110
------------ ------------ ------------ ------------
Gross profit 38,300 38,645 82,958 87,800
Selling and marketing expenses 26,432 26,920 58,192 60,799
General and administrative expenses 4,035 2,892 6,639 6,011
Non-recurring transaction expenses 637 - 7,747 -
Cost of restructuring 2,700 - 2,700 -
------------ ------------ ------------ ------------
Income from operations 4,496 8,833 7,680 20,990
Interest expense, net 6,985 - 12,411 -
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,489) 8,833 (4,731) 20,990
Income tax expense (benefit) (1,798) 3,365 (636) 7,997
------------ ------------ ------------ ------------
Net income (loss) (691) 5,468 (4,095) 12,993
Dividends on preferred stock 3,248 - 5,832 -
------------ ------------ ------------ ------------
Net income (loss) attributable to common stock $ (3,939) $ 5,468 $ (9,927) $ 12,993
============ ============ ============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated statements
(2)
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
Six Months Ended
July 4, 1999 July 5, 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,095) $ 12,993
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,726 7,394
Loss from disposal of property, plant and equipment 33 -
Deferred income taxes (635) -
Changes in assets and liabilities:
Trade and other receivables 297 (283)
Inventories 34 (4,419)
Prepaid expenses and other current assets 2,644 (1,648)
Accounts payable (1,886) (6,243)
Accrued marketing costs and other accrued liabilities 14,754 (1,012)
--------- ---------
Net cash provided by operating activities 18,872 6,782
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,589) (2,196)
--------- ---------
Net cash used in investing activities (2,589) (2,196)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt 470,481 -
Proceeds from issuance of preferred stock 113,485 -
Proceeds from issuance of common stock 50,000 -
Repayment of debt (170,537) -
Deferred debt costs (9,627) -
Advances and withdrawals with former parent prior to
recapitalization, net (5,887) (4,586)
Repurchase of common stock (453,000) -
--------- ---------
Net cash used in financing activities (5,085) (4,586)
--------- ---------
Net increase in cash and cash equivalents $ 11,198 $ -
Cash and cash equivalents at beginning of period - -
--------- ---------
Cash and cash equivalents at end of period $ 11,198 $ -
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 5,576 $ -
Income taxes 65 -
Noncash investing and financing activities: -
Deferred tax assets $ 112,906 $ -
Preferred stock dividend 5,832 -
Deferred tax liabilities 18,662 -
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated statements
(3)
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Six Months Ended July 4, 1999
(unaudited)
Additional Retained
Common Stock paid-in Earnings
Shares Amount capital (deficit) Total
--------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 - $ - $ - $ 166,944 $ 166,944
Net loss - - - (4,095) (4,095)
Issuance of common stock 5,000,000 50,000 - - 50,000
Preferred stock dividend - - - (5,832) (5,832)
Advances and withdrawals with former
parent prior to recapitalization, net - - - (5,887) (5,887)
Repurchase of stockholders' common stock
and recapitalization followed by
cancellation
of treasury stock including income tax
effects - - 112,906 (434,338) (321,432)
---------------------------------------------------------------------------
Balance at July 4, 1999 5,000,000 $ 50,000 $ 112,906 $ (283,208) $ (120,302)
===========================================================================
</TABLE>
The notes to consolidated statements are an integral part of these consolidated
statements.
(4)
<PAGE>
NEW WORLD PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter ended July 4, 1999 or for the six months ended
July 4, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999. These financial statements should be read
in conjunction with management's discussion and analysis included in Item 2. In
addition, for further disclosures, see the audited financial statements for the
year ended December 31, 1998 included in the Company's Registration Statement on
Form S-4 declared effective August 3, 1999 (Reg. No. 333-76763).
New World Pasta Company uses a calendar year annual reporting period,
with interim reporting broken down into 4-4-5 (4 week- 4 week -5 week) monthly
periods within each quarterly period. The Company's quarterly periods in 1999
end on April 4, July 4 and October 3 compared to April 5, July 5 and October 4
during 1998.
2. Description of Business
On January 28, 1999, Hershey Foods Corporation (HFC) completed a
recapitalization whereby New World Pasta LLC and Miller Pasta LLC acquired a
controlling interest in Hershey Pasta Group (HPG) while Hershey Chocolate &
Confectionery Corporation (HCCC), an HFC wholly owned subsidiary, retained a
substantial minority ownership interest. Prior to the recapitalization, HFC
completed a reorganization in which Hershey Pasta Manufacturing Company (HPMC)
became a wholly owned subsidiary of HCCC and the net assets of HPG were
transferred into HPMC. HPMC subsequently changed its name to New World Pasta
Company (New World Pasta).
As part of the recapitalization, New World Pasta repurchased $307.7
million of its common stock from HCCC, and New World Pasta LLC directly
purchased from HCCC $100.6 million of mandatorily redeemable non-voting
preferred stock and $41.7 million of common stock. New World Pasta issued $12.8
million of mandatorily redeemable non-voting preferred stock and $5.3 million of
common stock directly to Miller Pasta LLC. Upon completion of the
recapitalization, HCCC retained 6.0% of the voting equity of New World Pasta,
and New World Pasta LLC and Miller Pasta LLC held 83.4% and 10.6%, respectively.
The historical basis of accounting for New World Pasta has been maintained.
(5)
<PAGE>
New World Pasta manufactures and sells quality pasta products in a
variety of shapes, sizes, flavors and packages throughout the United States. New
World Pasta markets its products on a regional basis under several brand names,
including AMERICAN BEAUTY, IDEAL BY SAN GIORGIO, LIGHT N'FLUFFY, MRS. WEISS',
P&R, RONZONI, SAN GIORGIO and SKINNER. The company also manufactures certain
private label brands as well as products for industrial and foodservice
customers.
3. Inventories
New World Pasta values much of its inventories under the last-in,
first-out (LIFO) method and the remaining inventories at the lower of first-in,
first-out (FIFO) cost or market. Inventories valued using the LIFO method
totaled $7.9 million as of July 4, 1999 and December 31, 1998. All inventories
were stated at amounts that did not exceed realizable values. Total inventories
were as follows:
July 4, December 31,
1999 1998
--------- ---------
(In thousands)
Raw materials...................... $ 5,258 $ 5,901
Work in process.................... 337 320
Finished goods..................... 17,459 17,309
--------- ---------
Inventories at FIFO................ 23,054 23,530
Adjustment to LIFO................. (541) (983)
--------- ---------
Total inventories............. $ 22,513 $ 22,547
========= =========
4. Long-Term Debt
The Company's long-term debt is summarized as follows:
(in
thousands)
9 1/4% Senior Subordinated Notes due 2009
("Notes").................................... $ 160,000
Term Loan..................................... 139,650
---------
299,650
Less current portion.......................... 1,400
---------
$ 298,250
=========
The Company has entered into a senior credit facility (the "Credit
Facility") that currently provides for a term loan that bears interest at either
an alternate base rate plus 2.25% or a reserve-adjusted LIBOR rate plus 3.25%.
On July 4, 1999, the effective interest rate on the term loan was 8.25%. The
term loan matures in 2006. The term loan is repaid in quarterly payments of
$350,000 through March 2005, $32,900,000 on June 30, September 30
(6)
<PAGE>
and December 31, 2005, with the balance paid at maturity. The Company has fixed
the interest rate on $50.0 million of the outstanding debt at 5.645% plus the
credit agreement interest spread by entering into an interest rate swap
agreement. The credit facility provides for a revolving loan of up to $50.0
million. This portion of the facility bears interest at variable rates as
provided in the terms of the facility. No amount has been borrowed under this
portion of the facility at July 4, 1999.
The Credit Facility requires the Company to comply with specified
financial tests, maintain specified financial ratios and restricts the Company's
ability to undertake certain actions. The Company is in compliance with the
provisions of the Credit Facility.
5. Restructuring Charge
In the second quarter of 1999, the Company recorded a restructuring
charge, including related asset writedowns of $2.7 million. The restructuring
involves closure of the Kansas City, Kansas plant, which was a dedicated
facility for industrial business. The major industrial customer serviced by this
facility did not renew its contract, resulting in the decision to close the
facility. The plant ceased operations on August 20, 1999, and 61 of the 62
personnel currently employed at the facility were displaced. This action was
contemplated during the time the business was being recapitalized by HFC and the
affected personnel were notified in February of 1999 that this action may be
necessary if replacement industrial business was not obtained in the intervening
period.
Included in the restructuring charge is a non-cash charge of
approximately $1.6 million and accruals for cash charges for approximately $1.1
million as follows:
Original Utilized Balance at
------------------
(In millions) Balance Cash Noncash July 4, 1999
- - --------------------------------------------------------------------------------
Severance & other
Employee related costs $ 0.6 $ --- $ --- $ 0.6
Other facility exit costs $ 0.5 $ --- $ --- $ 0.5
- - --------------------------------------------------------------------------------
Total costs $ 1.1 $ --- $ --- $ 1.1
- - --------------------------------------------------------------------------------
6. Subsidiary Financial Information
Effective January 28, 1999, the Company has two wholly owned subsidiaries,
Pasta Group L.L.C. and Winchester Pasta, L.L.C. (collectively, the
"Subsidiaries"). Set forth below is summarized financial information attributed
to the combined Subsidiaries.Summarized financial information is presented for
the Subsidiaries because the Company's management does not believe that the
information provided in separate financial statements would be material to
investors.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Year Three Months Ended Six Months Ended
Ended 1998 July 4, 1999 July 5, 1998 July 4, 1999 July 5, 1998
--------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Sales........................... $ 303,697 $ 69,348 $ 66,323 $ 147,171 $ 151,055
Gross Profit........................ 152,459 36,974 35,863 79,272 80,158
Operating income.................... 32,973 7,011 6,064 15,280 13,376
Net income.......................... 18,136 7,243 3,252 15,512 7,380
Current assets...................... 46,719 56,576 56,576
Non-current assets.................. 142,402 224,103 224,103
Current liabilities................. 18,966 27,492 27,492
Non-current liabilities............. 22,937 9,581 9,581
</TABLE>
These Subsidiaries have, jointly and severally, fully and
unconditionally guaranteed the obligations of the Company with respect to the
Notes. The covenants of the Notes and the Credit Facility do not restrict the
ability of the Subsidiaries to make cash distributions to the Company.
The summarized financial information for the Subsidiaries has been
prepared from the books and records of the Company. The summarized financial
information may not necessarily be indicative of the results of operations or
financial position had the Subsidiaries operated as independent entities.
(7)
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The discussion set forth below, as well as other portions of this
quarterly report, and other reports and statements filed by the Company from
time-to-time with the Securities and Exchange Commission contain, or may
contain, statements concerning potential future events. Such forward-looking
statements are based upon the beliefs of, and the information currently
available to the Company's management, as well as estimates and assumptions made
by the Company's management, including assumptions about uncertainties and
risks. Readers can identify these forward-looking statements by the use of such
verbs as "expects", "anticipates", "believes", "estimates", "intends", "plans"
or similar verbs or conjugations of such verbs. If circumstances arise, the
Company's actual results could materially differ from those anticipated by such
forward-looking statements. The differences could be caused by a number of
factors or a combination of these factors. Among these factors are the
following:
. our high degree of leverage;
. the historic variability in the price of raw materials;
. the risks associated with several of our new marketing initiatives;
. intense levels of competition in the pasta industry;
. our ability to implement our year 2000 compliance plan;
. our ability to successfully integrate any future acquisitions;
. possible conflicts of interest; and
. changes in laws and regulations.
Readers are strongly encouraged to consider these factors and others
mentioned in our Registration Statement on Form S-4 (Reg. No. 333-76763)
declared effective August 3, 1999, when evaluating any such forward-looking
statements in this quarterly report. The Company undertakes no responsibility to
update any forward-looking statements contained in this report.
General
New World Pasta's primary business is the production of dry pasta,
which is marketed and sold under regional brands through supermarkets and
foodstores. Our operations are a continuation of the operations of HPG, which
began as a division of HFC in 1966. In a series of transactions that were
completed prior to the recapitalization in which our current principals acquired
control of New World Pasta, all of HFC's pasta-related operations were combined
into HPMC and its subsidiaries and HPMC's name was changed to New World Pasta
Company.
(8)
<PAGE>
Results Of Operations
Three Months Ended July 4, 1999 Compared With Three Months Ended July
5, 1998
Net Sales
Net sales increased by $0.3 million, or 0.3% for the second quarter
ended July 4, 1999 compared to the second quarter ended July 5, 1998. The
increase was primarily due to increases in unit volume offset partially by a net
price decline. Volume increased by approximately 1.1 million pounds due
primarily to growth in branded sales volume. Branded sales volume increased 2.6
million pounds or 3.2% from the similar period in 1998. The net sales increase
was also impacted by slightly lower unsaleables during the second quarter of
$0.3 million, 11.8% lower than the previous year's second quarter. Conversely,
Food Service volume decreased by 1.0 million pounds due to the loss of a major
Food Service account late in 1998.
The incremental branded volume is primarily the result of our revised
marketing strategy that includes pricing and promotional program changes.
Implementation of these changes was initiated during May, 1999 beginning with
the Eastern markets. The full impact of the revised price and promotion strategy
is not expected to be realized until the second half of 1999, when the retail
execution of these new promotion strategies is broadly implemented.
Cost Of Sales
Cost of sales increased by $0.6 million or 1.3% from the second
quarter of 1998 primarily due to the increase in volume described above.
Durum/semolina costs declined 1.7% in the second quarter of 1999 compared to the
second quarter of 1998. Packaging material costs, which increased over 6.0% from
the prior year's second quarter had an unfavorable impact on the quarterly
results. Freight costs were also slightly lower than the second quarter of 1998
due to favorable freight rates. As a result of these higher costs and increased
volume, gross profit declined by $0.3 million or 0.9% from the second quarter of
1998, reflecting the higher net sales revenue entirely offset by slightly higher
costs. Gross margin of $38.3 million was 45.3% of sales for the second quarter
of 1999 compared to $38.6 million, or 45.9% of sales for the second quarter of
1998.
Selling and Marketing Expenses
Selling and marketing costs declined by $0.5 million or 1.8% from the
second quarter of 1998. Selling costs increased by $0.1 million or 1.9% from the
previous year's second quarter as a result of slightly higher benefit and
personnel costs. Volume-sensitive trade promotions increased by $0.3 million or
1.4%. This cost reflected renewed promotional efforts of new company management
and paralleled the case growth
(9)
<PAGE>
in branded sales during the period. Consumer promotion spending decreased $0.5
million or 50.5%, primarily due to timing changes in the consumer promotion
schedule. Advertising costs decreased by $0.2 million or 9.7% due to decreased
emphasis on this promotional vehicle. Other marketing costs decreased by $0.2
million or 16.7% from the second quarter of 1998 due to reduced packaging change
costs and marketing research.
General and Administrative Expenses
General and administrative costs increased by $1.1 million or 39.5%
primarily due to costs incurred to transition to an independent operating
company. General and administrative costs also increased due to the transition
from the shared service cost allocation used by HFC. Since the transition from
HFC is essentially complete, the Company expects general and administrative
costs to stabilize in the coming quarter.
Cost Of Restructuring
The cost of restructuring of $2.7 million is the estimated cost of
executing the closing of the Kansas City, Kansas plant announced May 20, 1999.
Included in this estimate is the cost of severance for plant employees, the
write-off of equipment, as well as other facility exit costs. While the Company
expects such charge to be approximately $2.7 million, no assurances can be made
that such cost will not be in excess of the $2.7 million already recorded.
Income From Operations
Income from operations for the quarter ended July 4, 1999 was $4.5
million, a decline of $4.3 million or 49.1% compared to the quarter ended July
5, 1998. The decrease was primarily due to an increase in cost of sales, non-
recurring transaction expenses, costs incurred to transition to an independent
operating company, and expenses attributable to the planned Kansas City plant
closing.
Income Taxes
The income tax benefit for the second quarter ended July 4, 1999
reflects the anticipated tax benefits resulting from the loss for the period and
adjustments to income taxes based on further analysis of permanent differences
between book and tax for non-recurring transaction expenses.
Net Income (Loss)
The Company experienced a net loss of $0.7 million for the second
quarter of 1999 compared to $5.5 million of income in the second quarter of
1998. This decrease was due primarily to increases in cost of sales, non-
recurring transition expenses, costs incurred to transition to an independent
company, expenses attributable to the Kansas City plant closing and to the
interest expense on the Company's outstanding debt.
(10)
<PAGE>
Results Of Operations
Six Months Ended July 4, 1999 Compared With the Six Months Ended
July 5, 1998
Net Sales
Net sales decreased by $12.1 million, or 6.3% for the six-month period
ended July 4, 1999 compared to the six-month period ended July 5, 1998. The
decrease for the six-month period ended July 4, 1999 was primarily due to
decreases in unit volume and to a lesser extent net price declines. The
continued effect of HFC's strategy, focused on short-term return on investment
at the expense of sales unit growth, was the main reason for the volume
shortfall. Volume was also negatively effected by the loss of a major Food
Service account late in 1998. Comparison of the first six months of 1999 to the
first six months of 1998 is also impacted by the difference in competitive
intensity prevalent within the industry. Management expects sales unit growth
over the last six months of 1999 to offset the majority of the volume decline in
the first six-month period. This expected sales growth will be the result of the
full retail implementation and execution of price and promotion strategies
recently implemented by new management.
Operating Expenses:
Cost Of Sales
Cost of sales declined by $7.3 million or 6.9% from the first six
months of 1998. In addition to the reduction resulting from the volume decline,
the most significant factor was the impact of lower durum/semolina costs during
the period. Durum/ semolina costs declined 13.0% during the first six months of
1999 versus the first six months of 1998. Freight costs were also slightly lower
than the first six months of 1998 due to favorable freight rates and improved
inventory management. Gross profit declined by $4.8 million or 5.5% from the
first six months of 1998, reflecting the lower level of sales revenue partially
offset by the aforementioned cost reductions. Gross margin of $83.0 million was
45.9% of sales for the first six months of 1999 compared to $87.8 million, or
45.5% of sales for the first six months of 1998.
Selling and Marketing Costs
Selling and marketing costs declined by $2.6 million or 4.3% as
compared to the first six months of 1998. Selling costs increased by $0.1
million or 0.7% from the previous year's first six months. Slightly higher
benefit, personnel and other administrative costs provided an offset to the
volume-driven decline in this area. Volume-sensitive trade promotions declined
by $1.3 million or 3.0%, due to the reduced volume and due to changes in
promotional strategy. Advertising costs declined $0.5 million or 13.9%, as a
result of changes in promotional management strategy. Consumer promotion
spending decreased $0.8 million or 41.0%, due to reduced emphasis on this
promotional vehicle during this period. Other Marketing costs decreased by $0.1
million, or 3.0% from year-to-year, due to decreased marketing research.
(11)
<PAGE>
General and Administrative Costs
General and administrative costs increased by $0.6 million or 10.5%
primarily due to costs incurred to transition to an independent operating
company. Reduced employee relocation costs, dues and subscriptions and bad debt
expenses somewhat offset these transition costs.
Cost Of Restructuring
The cost of restructuring of $2.7 million is the estimated cost of
executing the closing of the Kansas City, Kansas plant announced May 20, 1999.
Included in this estimate is the cost of severance for plant employees, the
write-off of equipment, as well as other facility exit costs. While the Company
expects such charge to be approximately $2.7 million, no assurances can be made
that such cost will not be in excess of the $2.7 million already recorded.
Income From Operations
Income from operations for the six months ended July 4, 1999, was $7.7
million, a decline of $13.3 million or 63.4% compared to the six months ended
July 5, 1998. The decrease in income from operations was due primarily to the
cost of restructuring, non-recurring transaction expenses, costs incurred to
transition to an independent operating company and the decrease in sales volume,
offset partially by a decrease in other operating expenses.
Income Taxes
The income tax benefit for the six months ended July 4, 1999 of $0.6
million reflects the anticipated tax benefits resulting from the loss for the
period adjusted for estimated permanent differences between book and tax for
non-recurring transaction expenses.
Net Income (Loss)
The Company experienced a net loss of $4.1 million for the first six
months of 1999 compared to $13.0 million of net income in the first six months
of 1998. This decrease was due to increases in non-recurring transaction
expenses, costs incurred to transition to an independent operating company,
expenses attributable to the Kansas City plant closing and to the interest
expense on the Company's outstanding debt.
(12)
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash provided by
operations and borrowings under its Credit Facility. Cash and cash equivalents
totaled $11.2 million at July 4, 1999, and working capital was $11.2 million as
of July 4, 1999, compared to $20.8 million as of December 31, 1998. The decrease
in working capital was primarily the result of increased accrued liabilities
partially offset by increased cash and cash equivalents. The current ratio was
1.30 at July 4, 1999, compared to 1.74 at December 31, 1998.
The Company's net cash provided by operating activities was $18.9
million for the six months ended July 4, 1999, compared to $6.8 million for the
six months ended July 5, 1998. This increase was due to a decrease in the
Company's inventory purchases and increases in accrued liabilities.
Net cash used in investing activities totaled $2.6 million for the six
months ended July 4, 1999 versus $2.2 million for the six months ended July 5,
1998 primarily due to slightly higher capital spending levels.
Net cash used in financing activities for the six months ended July 4,
1999 reflects the payment of debt proceeds received in conjunction with the
recapitalization, the issuance of debt ($470.5 million), the net proceeds from
issuance of the preferred stock ($113.5 million) and the issuance of common
stock ($50.0 million), offset primarily by the repurchase of common stock
($453.0 million). Additionally, the Company made an advanced principal payment
of $10.0 million during the six-month period ended July 5, 1999.
The covenants of the Notes and the Credit Facility do not restrict the
ability of the Subsidiaries to make cash distributions to the Company.
Management believes that net cash provided by operations, together
with availability under the revolving loan portion of its credit facility, will
be sufficient to meet the Company's expected capital and liquidity needs for the
foreseeable future.
(13)
<PAGE>
Year 2000 Compliance
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, these systems
will recognize the Year 2000 as "00." This could cause many computer
applications to fail completely or to create erroneous results unless corrective
measures are taken. New World Pasta utilizes software and related computer
technologies essential to its operations that will be affected by the Year 2000
Problem. While it is difficult to assess the exact nature of the consequences to
New World Pasta of a failure to be Year 2000 compliant, it has been determined
that such a failure could have a material adverse effect on New World Pasta's
operations.
New World Pasta's effort to address the Year 2000 Problem has been
divided into five phases.
Assessment
In this first phase, which the Company has largely completed, the
Company assessed its hardware and software systems, and the embedded systems
contained in the Company's buildings, plants, equipment and other
infrastructure. The Company's goal was to identify and prioritize those areas of
the business operations affected by the Year 2000 Problem. As a result of this
review, the Company has:
. identified the kind and amount of necessary resources, such as money and
labor needed in our remediation effort,
. determined validation strategies and testing plans on a system-wide basis,
and
. determined the need for contingency plans, particularly for core business
processes.
Renovation
The second phase involves making software and hardware changes,
developing replacement systems, and eliminating non-functional applications or
system components. The Company entered into a contract with a vendor to perform
the remediation of the mission critical software on the AS/400. The project was
completed on schedule in August, 1999. The Company has also completed
significant testing of embedded systems and hardware in the plants and has found
its exposure to be minimal. The Company does however have to remediate certain
plant systems that interface with the Company's AS/400. This plant system
remediation is expected to be completed during November, 1999. The Company has
also engaged an independent third party to review its Year 2000 remediation
plans, and actions taken to date. This review commenced late in the second
quarter of 1999 and is expected to be completed in the third quarter.
Validation
As the Company makes changes to applications and components of its
systems, the Company's intention is to validate and test those changes for Year
2000 compliance. The Company is performing validation and testing on a system-
wide basis to ensure that
(14)
<PAGE>
the changes are compatible with other aspects of its information systems.
Acceptance testing is also being conducted where it deems necessary. Much of
this testing has been satisfactorily completed and the Company anticipates
finalizing this phase during November 1999.
Implementation
This phase involves integrating the changes made as part of the above
process into New World Pasta's overall information system. As the Company
implements and integrates the identified changes, it may discover that its
systems include other non-compliant Year 2000 applications and components. The
Company does not expect this integration to have any significant adverse effect
upon its operations, but will develop appropriate contingency and disaster
recovery plans to reduce the risk of such effects. Much of this implementation
has been completed at this time, without any material adverse consequences. The
Company anticipates completing implementation of Year 2000 applications for our
mission-critical systems during November 1999.
Third-Party Compliance
The Company realizes that third-party suppliers and customers could
affect our Year 2000 readiness. It has made contact with many of its key
suppliers to determine their Year 2000 compliance. The Company is making
additional contacts and taking necessary steps to ensure that our primary
customers and suppliers are Year 2000 compliant.
Contingency Plans
The Company is in the process of finalizing its contingency plans,
including the identification of its most reasonably likely worst-case scenarios
and methods to address any disruption which could occur as a result of these
scenarios. Contingency plans may include stockpiling raw and packaging
materials, increasing finished goods inventory levels, securing alternate
suppliers and developing manual processes to address issues that could result
from a system failure.
Costs incurred to date to address the Year 2000 Problem have been $0.4
million. The Company expects to incur incremental expenses of approximately $0.6
million through the end of 1999 to resolve any known Year 2000 Problems that
relate to mission critical systems.
(15)
<PAGE>
New Accounting Standard
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the Standard). The Standard
establishes comprehensive accounting and reporting standards for derivative
instruments and hedging activities that require a Company to record the
derivative instrument at fair value in the balance sheet.
Furthermore, the derivative instrument must meet specific criteria or
the change in its fair value is to be recognized in earnings in the period of
change. To achieve hedge accounting treatment the derivative instrument needs to
be part of a well-documented hedging strategy that describes the exposure to be
hedged, the objective of the hedge and a measurable definition of its
effectiveness in hedging the exposure. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Data of SFAS No. 133." SFAS No. 137 delays the Standard effective
date to the beginning of the first quarter of the fiscal year beginning after
June 15, 2000. Adoption of this statement is not expected to have a material
effect on the Company's financial statements.
(16)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
New World Pasta is subject to market risk associated with some commodity
prices and, effective with the revolving credit agreement it entered into in
January 1999, changes in interest rates. At December 31, 1998, New World Pasta
had open commodity futures contracts with approximately $2.0 million of deferred
losses. During the first half of 1999, New World Pasta closed out these
contracts and recognized $1.0 million of losses. At July 4, 1999, New World
Pasta had approximately $1.0 million of deferred losses that will be recognized
during the second half of 1999. New World Pasta has entered into a procurement
agreement with Miller Milling Company, a related party, pursuant to which Miller
Milling Company will supply all of the Company's raw material commodities.
Accordingly, the Company does not anticipate entering into any further commodity
futures contracts.
To manage the risk of fluctuations in interest rates, New World Pasta's
borrowings are a mix of fixed and floating rate obligations. This includes the
$160.0 million of notes that bear interest at a 9.25% fixed rate and are due
2009. New World Pasta's $140.0 million term loan bears interest at a floating
rate. In May 1999, New World Pasta entered into an interest rate swap agreement
that converts $50 million of this floating interest rate debt to a fixed rate.
The interest rate under the interest rate swap agreement is approximately 8.9%,
and expires June 2, 2002. The carrying amount of New World Pasta's debt
obligations approximates the fair value of similar debt instruments of
comparable maturity, and the interest rate market risk is currently not
considered significant.
(17)
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Form 8-K's
Not Applicable
(18)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signatures.
NEW WORLD PASTA COMPANY
Date: September 16, 1999 /s/James A. Bohenick
----------------------- ----------------------------
James A. Bohenick
Vice President, Finance and
Chief Financial Officer
Date: September 16, 1999 /s/Thomas P. Boran
----------------------- ----------------------------
Thomas P. Boran
Chief Accounting Officer
(19)
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